Here's What Credit Suisse Is Saying About Stocks To Its Private Banking Clients

The logo of Swiss bank Credit Suisse is seen at an office building in Zurich. REUTERS/Arnd Wiegmann October was no easy month for investors. A long-anticipated correction in equity markets finally happened, set off by the one-two-three punch of bad economic data in the euro zone, tensions in the Middle East, and heightened concerns that the U.S. Federal Reserve might tighten policy sooner than expected. The S&P 500 dropped more than 5 percent during the week ending October 15, while the VIX volatility index nearly doubled. Investors are naturally wondering whether the bull market is over, or, at the very least, whether equities' risk-reward ratio has become a little top-heavy.

Credit Suisse says no. Despite the recent turmoil, equities remain the preferred asset class of the bank's Private Banking and Wealth Management division. One reason: they're cheaper than they were a few months ago. The market weakness in October pushed equity valuations back into neutral territory. Another: relatively speaking, they still look better than the alternatives. Setting aside capital appreciation, for example, simply consider the yield. Two-year U.S. Treasury bills currently pay just 0.53 percent, while the yield on 10-year notes is 2.33 percent. The average dividend yield for stocks in the Dow Jones Industrial Average? 2.69 percent. What's more, bond yields aren't headed much higher any time soon. "Bond yields are likely to stay lower than what most had anticipated," Michael Strobaek, Global Chief Investment Officer at Credit Suisse's Private Bank, said in a recent video.

The greatest upside is to be found in Japanese and European equities, according to Gerald Moser, head of equity analysis at Credit Suisse's Private Bank. While market jitters in Europe were driven by concerns about sluggish economic growth, Credit Suisse doesn't believe Europe's slowdown will tip the global economy back into recession. What's more, European valuations have become more favorable since the selloff that sent the Euro STOXX 50 index tumbling 11 percent in the month ending October 16. European and Japanese equities are also getting a boost from more aggressive monetary stimulus programs that aim to encourage lending. The Bank of Japan announced in late October that it would buy more government debt, while the European Central Bank said in September that it was ready to start purchasing asset-backed securities and covered bonds. Finally, export-focused European and Japanese companies - and their stocks — are aided by a strong dollar. The Fed is expected to raise rates next year while borrowing costs in Europe and Japan remain near zero. All other things being equal, the dollar should continue to appreciate.

And that brings us to the U.S., the only major developed economy showing promising signs of growth. That fact in itself is supportive of U.S. equities, as was third quarter earnings season, which yielded the strongest ratio of companies beating earnings expectations since the fourth quarter of 2009. Among S&P 500 stocks, 80 percent of companies reporting exceeded estimates, significantly higher than the long-term average of 69 percent, according to Credit Suisse. Led by strong showings in the health care and financial sectors, earnings surprised by 5.2 percent, compared with a 10-year average of 4.4 percent. The improving economy should continue to act at a tailwind to earnings as well. Credit Suisse's Private Banking division forecasts earnings growth of 10 percent over the next 12 months, compared with just 6.6 percent over the past year.

So it's not a time for panic. In the U.S. and Japan, markets have already made up for their October declines and then some. The Dow Jones Industrial Average, for instance, has risen 9 percent since its October 16 low, and closed at its 23 rd record high of the year on November 10. "[The] value has been restored," says Strobaek. "We stick to our long term view that equities are the better asset class."

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